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Empirical Costs Situation

The empirical studies of costs are of two broad types: statistical analysis and cost estimates. Cost estimates are less frequently cited in the literature, but those are probably more important from the viewpoint of managerial decision making. It is in the field of cost estimates and cost projections that the special knowledge and skill of the cost accountants are of vital importance.

A number of statistical cost studies present cost-output relation in the short run. Certain conditions should be satisfied so that the statistical cost functions may be of some value for business decision making. These conditions are:

(i) The basic time period for series of paired observation on costs and output should be one in which the observation during the period. If a week is the time period taken, the daily production should be reasonably constant.

(ii) Cost fingers should be directly paired with the corresponding output figures. We do not get any meaningful if we associate costs recorded in period t₀ with the output finger in period t₁, unless there is one period lag between costs and output flow.

(iii) There should be a wide spread of output observations so that cost behavior can be observed at widely different outputs.

(iv) The experimental data should not be contaminated by factors extraneous to the cost functions, such as changes in factor prices, etc.

The statistical cost function which have been estimated, satisfying these conditions, do not always come in conformity with the theoretical cost functions

The economists often assume absence of segmentation and variable factor proportions. Such assumption rule out discontinuities in production-cost functions.